Financial Sector Assessment a handbook, Chapter 4 Assessing Financial Structure and Financial Development, imf and World Bank, August 2005

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far-reaching nature of the reforms, calls for reliance on careful justification of policy pro-
posals. For example, if what is needed is greater independence of the regulatory authority 
or greater liberalization of interest rate spreads, elimination of compulsory reinsurance 
cessions, commercialization and privatization of the major banks, or liberalization of entry 
by foreign financial service providers, then this need must be embedded in terms of the 
vision of the future financial system and of the desired potential benefits.
Reforms will take time, and policy makers need to know what the priorities are—both 
what is more important and whether specific sequencing is required. Sequencing and 
coordination of different measures are important to ensure a robust transition path. For 
example, early liberalization of deposit rates may not be appropriate in a system still 
dominated by poorly managed state-owned banks whose insiders’ apparent goal is market 
share rather than sustained profit. Similarly in a system with large nonperforming loans 
and significant corporate financial fragility, some initial bank and corporate restructur-
ing and some strengthening of prudential supervision may be needed before substantive 
liberalization of interest rates and entry. Thus, the scope and priorities of policy measures 
would depend both on the state of development of the financial sector and on the initial 
level of financial stability.
Against this background, rather than (or in addition to) presenting a comprehensive 
list of reforms, it is suggested that four or five themes may be identified in order of their 
importance, and the major thrusts of reform under each theme may be explained and pri-
oritized. The particular conditions in each country would determine what those themes 
should be. No template is offered here nor should one be. Some of the themes might cut 
across sectors. For example, it could be a needed strengthening of political independence 
of regulatory authorities in several subsectors, or it could be a lack of competition and 
contestability reflecting inappropriate regulation in several sectors, or it could be the need 
for a root-and-branch reform of the tax code. Identifying the fact that such problems crop 
up in several sectors will help decision makers who are concerned with each sector realize 
the common position that they are in and may help point to the potential for organi-
zational or legislative approaches that may not seem feasible to those in charge of any 
one sector. Other themes may be sector specific, such as either inadequate enforcement 
of stock exchange rules on transparency or a chaotically dysfunctional credit registry. 
Even if a similar problem exists to a lesser extent in other sectors, pointing the finger at 
a particularly damaging weakness can help ensure that top policy makers will allocate the 
financial and political resources necessary to fix it. The design and prioritization of broad 
themes and specific measures under each theme should help support financial and mac-
roeconomic stability and should facilitate effective implementation. The principles and 
considerations in sequencing of reforms are more fully explained in chapter 12.
Notes
1. For example, if it is found that some services, such as reinsurance or elements of invest-
ment banking, are more effectively provided to a particular small country by foreign 
markets or firms, then there is a presumption that policies blocking access to foreign 
provision of those services should be dismantled, even though this dismantling may 

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Financial Sector Assessment: A Handbook